Tuesday, January 20, 2009

Luigi Zingales has it right

He may be a little too jaundiced about nationalisation - but here is the money quote:

Get a strategy

To begin, you (Mr Geithner) need an overall strategy. Even a mediocre strategy is better than an ad hoc approach that confuses markets and fuels the perception of playing favorites. Legendary portfolio manager David Swensen (who in 23 years transformed the $1 billion of Yale endowment into $23 billion) in reference to the government intervention in this crisis commented “the government has done it with an extreme degree of inconsistency. You almost have to be trying to do things in an incoherent and inconsistent way to end up with the huge range of ways they have come up with to address these problems.”

The cost of ad hocery

The cost of this inconsistency is that it has forced the private capital to stay on the sideline. Short of a complete nationalization of the financial sector (which we hope is not in the plan), the problem cannot be resolved without the help of private capital. But a necessary condition to attract private capital back is a consistent and predictable strategy by the government. Without it any other effort is in vain.

I should note I disagree with a lot the rest of Zingales paper - and will explain why in a later post.

I do not oppose nationalisation - but I would prefer that private money came to the fore. Private money will not pony up if they do not know the rules.

The way to do nationalisation is nationalisation AFTER due process. Due process (anywhere) does not seem to have been a hallmark of the Bush administration.

Confiscation without process (WaMu springs to mind) guarantees that there will be a private capital strike.

With a private capital strike everything eventually needs the government to bail it out. Everything - JPM and Goldies included.

How do you think the various parts of the capital structure will be treated in a full nationalization scenario?

It seems certain that the equity and preferred will be destroyed. But what about the unsecured debt? When the Swedes experienced their financial crisis, I think the govt guaranteed all the creditors. Anyway, any thoughts will be appreciated.

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